Inheritance Tax changes: Could a Family Investment Company help?
The Autumn Budget held in October 2024 included several significant changes to the UK tax regime. Notably, from April 2026, the 100% inheritance tax (IHT) relief for agricultural and business property will be limited to the first £1million of qualifying assets.
Currently, the IHT rate in the UK is 40% on estates with a value over the nil rate band (NRB) of £325k, alongside the residence nil rate band (RNRB) at £175k. The RNRB is tapered down once an individual's estate is worth more than £2million. As announced in the Budget, those thresholds will be frozen until (at least) April 2030.
One way of potentially mitigating the effect these changes will have on IHT liabilities is through a Family Investment Company (FIC). It is important to note that FICs aren’t suitable for everyone, but they can provide tax efficiency and a structured method of longer-term succession planning for those with significant wealth, either held personally or within an existing business.
What is a Family Investment Company?
A Family Investment Company is a private limited company which is usually set up by parents or grandparents as a method of managing their wealth for future generations. It can be a stand-alone company or, potentially, become part of an existing corporate group.
Instead of the senior family members gifting assets directly to their children or grandchildren, they transfer wealth into this company. Founders of the FIC can transfer assets such as shares, cash or property into the FIC, which then holds those investments for the benefit of the wider family.
Within the FIC, senior family members subscribe for voting shares, potentially without any dividend entitlement, allowing them to stay in control of the FIC, whereas the future generations hold non-voting income-bearing shares or growth shares which entitle them to income and/or future company growth.
What are growth shares?
Growth shares within Family Investment Companies allow for a founder’s family members to feel the benefit of future investment growth as well as some tax benefits. Implementing growth shares involves the creation of a new class of shares which have rights attached to them which only allow those shares to have value once they surpass an agreed value threshold.
Any existing shares then become “freezer shares”, meaning the value of these shares is frozen to allow the growth shares to benefit from any increase in value. Growth shares can be created with or without voting rights depending on whether the owners of the freezer shares wish to keep voting control over the company.
What are the IHT benefits of FICs?
FICs provide a way of reducing IHT exposure, without giving up control of your wealth.
Key benefits include:
- Freezing the value of the estate: By transferring assets into the FIC, the value of those assets is fixed in the founder's estate. Any subsequent growth takes place within the company, freezing (and with some modifications, reducing) the founder’s taxable estate over time.
- Access to funding/investment: The planning allows the funder of the FIC to access their investment in a tax efficient manner by structuring the investment as a loan. This means that the founder can continue to access and enjoy the sums lent – or they can gift the loan receivable to their family if desired.
- Tax-efficient gifting: Shares in the FIC can be gifted to family members regularly using the annual £3,000 gifting allowance. Over time, this strategy can help to reduce the value of the founder’s estate for IHT purposes.
We are here to help
While a FIC can be a great option in the right circumstances, there are associated costs and responsibilities which mean that they are most appropriate for those with significant sums at stake. The tax and commercial implications of each stage of the planning needs to be considered carefully. It’s vital that you take advice and that’s where we can help.
If you would like to discuss whether a FIC is right for you or have any questions about the impact of upcoming IHT changes, please get in touch with a specialist Tax advisor.
